Follow the Money to the Clean Economy

Asset managers globally  are increasingly focusing on investment in climate solutions, while deforestation, biodiversity and water gain ground, explains Ceres Vice President Kirsten Snow Spalding.

Climate action in the investment community has faced  contrarian winds lately, yet, asset managers’ engagement on the issue continues to gain steam.

Or at least, so it seems when one looks at the scale achieved by the Net Zero Asset Managers (NZAM) initiative. Launched in 2020, the group now counts 328 signatories representing a combined US$57.6 trillion in assets under management.

“The growth has been dramatic,” said Reverend Kirsten Snow Spalding, Vice President of the Ceres Investment Network, which includes 220 institutional investors managing roughly US$46 trillion in assets, and a founding partner to NZAM. “Although this is a voluntary initiative, we’re observing that making net zero commitments and setting strong interim targets are really becoming the norm for the asset management community.”

According to Spalding, around half of the world’s asset managers – measured by AUM – are now part of NZAM, including household names such as BlackRock, State Street Global Advisors, or JP Morgan Asset Management. Of the 328 signatories, 244 have already disclosed climate transition targets – something which members are required to do within a year of joining the initiative.

In addition, 193 signatories have already begun to report on progress on those commitments – either via the Principles for Responsible Investment (PRI) platform, or through the Carbon Disclosure Project (CDP) reporting framework.

“We will be publishing a report on NZAM soon, building on the Glasgow Financial Alliance for Net Zero’s (GFANZ) latest progress report,” said Snow Spalding. “We’re still analysing the disclosures that came through the latest round and will go in a little more depth, but we’re excited to see that more than half of signatories have already reported.”

Led by an international group of asset managers, NZAM aims to support the goal of net zero greenhouse gas (GHG) emissions by 2050 and contribute to efforts to limit global warming to 1.5°C. It is one of several sub-sector initiatives under the GFANZ umbrella, alongside the Net Zero Asset Owner Alliance, the Net Zero Banking Alliance, the Net Zero Insurance Alliance, the Net Zero Financial Service Providers, and the Venture Capital Net Zero Alliance.

“Across the entire finance sector, all these alliances recognise the same need for accelerated action to address climate risks and look for climate opportunities,” said Snow Spalding. “There is consistency across these global initiatives.”

Making headway

As part of their NZAM commitments, signatories must annually report on their progress on the 10 points outlined in the initiative. These include setting interim targets for 2030, providing asset owner clients with information and analytics on net zero investing, implementing a stewardship and engagement strategy, as well as engaging with key actors in the investment ecosystem.

Progress on these targets, however, has been uneven. A survey of ESG practices among asset managers released in October last year found that many NZAM members were so far only managing a small portion of their assets in line with net zero.

Asset managers typically report through the CDP or PRI frameworks, thereby providing further transparency to investors on whether they actually meet their commitments.

“It gets down to asset managers wanting to address climate risk across their portfolios, and to look for the opportunities in the low carbon economy that’s coming,” said Snow Spalding. “The exciting thing is that we’re seeing more investors focus on this: they’re setting investment targets, and recognising that these are real value-creating opportunities for their portfolios.”

While asset managers largely focused on decarbonising over the last two years, their attention is now shifting to investment in climate solutions, Snow Spalding explained.

“It won’t be just the managers acting alone – this will be done in partnership with owner clients, and they will be looking for those opportunities together,” she added. “At a high level, there’s a norm whereby most asset managers have forward-looking investor climate action plans. Not all of them are complete, but they’re doing the hard work of setting in place plans and policies to move their portfolios.”

Many asset managers have also developed Investor Climate Action Plans (ICAPs) and are using the Net Zero Investment Framework – an outcome of the Paris-Aligned Investment Initiative (PAII) established in 2019 by an investor forum coordinated by Ceres, the Institutional Investors Group on Climate Change (IIGCC), the Asia Investor Group on Climate Change (AIGCC) and the Investor Group on Climate Change (IGCC). The framework provides investors with robust guidance on governance, targets, strategic asset allocation, market engagement and policy advocacy.

“The approaches are individual, based on the strategies and particular investment philosophy of individual managers,” said Snow Spalding. “We’re seeing a lot of variations in approach, but some consistency around methodologies.”

Winds of change

Although much progress has been made on take-up of the NZAM initiative, with only half of the world’s assets under management currently signed up to it, there does remain room for more. This begs the question of whether more could be done to attract further signatories.

“The lack of internal resources to focus on climate risks and seek relevant opportunities is a barrier: it does take internal capacity-building, and ensuring that everyone is educated on the subject,” said Snow Spalding. “It used to be that you just looked at volatility in the market – that was the only risk people cared about. But now, the recognition that climate impacts everything means you’ve got to get new expertise.”

Many firms are in the process of developing their staffing resources to respond to this need. Many are also starting to issue ICAPs and are taking steps to put in place proxy voting policies, statements of investment beliefs, or are determining their climate change focus.

“They get those pieces in place, they build their expertise, and then they’re ready to make net zero commitments,” Snow Spalding continued. “There’s a recognition that they can’t do this alone. You can’t just manage one company at a time to address climate change – you’ve got to work across the economy.”

Joining NZAM is one the ways to increase capacity, the vice president highlighted – further stressing the crucial role that such initiatives can play in aligning global efforts towards net zero.

Although until now, many investors were saying that data quality and availability was standing in the way of progress, that is also slowly changing.

“There’s been a shift to address the challenge of just looking for more emissions data from companies, to now demanding actual climate action and transition plans,” said Snow Spalding. “Investors are acting in spite of data gaps and asking the companies that they hold in every portfolio – passives, public equities, private markets, fixed income – how they’re going to move forward.”

The vice president described this as a positive trend, adding that it was a way to think “out of the box” – particularly on Scope 3 emissions data, which is typically more difficult to collect as it involves third-party contributions.

US focus

Last week was marked by a decision from JP Morgan Asset Management and State Street Global Advisors to leave Climate Action 100+ (CA100+) – an investor initiative counting 700 signatories worth over US$68 trillion in assets, which aims to engage with major corporate polluters on their climate disclosures and actions. BlackRock also said it would transfer its CA100+ partnership to a smaller international arm, pulling its corporate membership in the group.

NZAM has suffered its own withdrawals, with Vanguard having left the initiative in December 2022, following pressure from Republican attorneys-general.

Despite these tactical shifts – which some may interpret as receding commitments – and the aggressive anti-ESG campaign that continues to plague the US political scene ahead of the upcoming presidential elections, Snow Spalding is not alarmed by the state of US asset managers’ engagement on climate change.

“I’m not feeling that addressing climate change is on the wane [in the investor community] – it’s the strategies that may differ,” she said. “There are different ways of approaching this, and each investor has to make their own decision about how to set and meet their commitments, and achieve the targets that are necessary.”

Climate change continues to represent material financial risk to portfolios, and member of initiatives such as NZAM continue to be very attuned to that reality.

“Certainly, there’s a lot of pressure from the oil and gas industry to stop working on these issues, but the science is clear,” said Snow Spalding. “Policymakers are acting, and investors have to respond to the economy that exists today and the one that’s coming – the ‘clean’ economy. Addressing these issues is not going to go away.”

Public policies, such as the Inflation Reduction Act, can also play a key part in continuing to spur engagement from the investment community.

“Investors are following that money,” said Snow Spalding. “They recognise that they stand to create more value by investing alongside those government resources, and by encouraging companies to take advantage of those incentives and loan guarantees to really move forward.”

Beyond asset owners’ and managers’ growing commitment to the climate transition, other trends are emerging among investors – including a new focus on biodiversity through initiatives such as Nature Action 100, which aims to drive greater corporate ambition on tackling nature loss and biodiversity decline.

Meanwhile, the Valuing Water Initiative helps to drive corporate action on water-related financial risks and engage companies on sustainable water practices – a “critical” new issue, according to Snow Spalding.

“Overall, I don’t see the work slowing down in any corner,” she added. “Deforestation, biodiversity, water – these are all cutting-edge topics that we’re going to see grow alongside accelerated action on climate change over the next year.”

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